New Zealand governments usually aren’t very brave. They toe the line. Tinker here and there. And we muddle on, prosperous for some, impoverished for many.

So this week’s announcement caught me by surprise. Or maybe it didn’t.

We had previously mentioned that deductibility of interest gives property investors an advantage. And on 8 March, we specifically suggested restricting debt by tax deductibility.

Courageously, Jacinda Ardern’s government has done just that. Despite the risk of losing the vote of the high proportion of residential property investors in this country.

Buy a rental property next week — and from 1st October, you will not be able to claim interest expense as a deduction from rent.

Already own a rental property? Deductibility will be phased out:

  • FY to 31 March 2022 (from October 2021) — 75% of interest deductible.
  • FY to 31 March 2023 — 75% interest expense deductible.
  • FY to 31 March 2024 — 50% deductible.
  • FY to 31 March 2025 — 25% deductible.

Thereafter, zilch.

Now, that’s the brave part. As for the bright-line extension, you won’t get much more than a yawn from me. If you want to do-up and speculate on housing, it appears the best way to do that would be to keep upgrading your exempted primary residence.

 

Property investors claim they are being blindsided by the interest hit

 

They are. But a good investor should be aware of and prepared for blind spots.

Andrew King, president of the NZ Property Investors Federation, seemed to suggest to the Herald it was unfair that every other business could claim interest tax deduction, but not landlords.

Some investors I’ve spoken to — and callers to Newstalk ZB the other day — were spitting blood.

Many threatened to increase rents to absorb the extra costs. Which, by some estimations, could mean around $6,000-a-year per property.

This is disingenuous. Having been a landlord for many years, I know all too well that most rents are already at the maximum level many tenants can afford to pay. And, for a good tenant, you’re usually better off to keep the rent contained to keep them.

There will be very few cases where owners will be able to hike rents by $120 a week. To cover the average expected shortfall when 0% deductibility hits.

Even more disingenuous is suggesting that most residential rental homes are a ‘business.’ Most operators do not provide the service at any scale. Nor are they incentivised to grow profits by delivering a more productive service.

A low-yield building that mainly allows one customer to have a roof over their head looks more like a social good, not a market product. Perhaps we need to change the way we provide it?

Businesses produce profits across many customers. They, in turn, are subject to industry, health, trading, taxation, and countless specific regulations.

Many jurisdictions limit mortgage deductibility on residential rents. People have become far more accustomed to investing in businesses there. And financial instruments like stocks and shares.

 

 

But tough medicine is scary

 

The NZ dollar fell around 2.3% on these announcements. Our job investing in global markets also became a little harder due to this.

Experience tells me forex traders usually see the writing on the wall before anyone else. Though their thinking can be very short-term.

Nonetheless, that level of fall in a single day suggests these changes could do some economic damage. Because this country is more heavily invested in housing and mortgages than others. Without the cushion of deeper financial assets.

There is also one thing property investors may be right on. These changes may only exacerbate the shortage of rental homes in this country.

More and more, we are hearing from landlords quitting the habit. This will likely push more over.

Unless there is another social or familial reason to own extra houses (such as providing for children or having a home in another location) the buy-to-let equation has become more tenuous at the stroke of the government’s pen.

Well, there is also the $3.8 billion Housing Acceleration Fund targeting land and infrastructure. ($5.8 billion if you include the new borrowing remit for Kāinga Ora).

This seems limited given the spend on wage subsidies of over $13 billion.

Shortages of rental housing look set to remain. Yes, probably worsen.

And if the Reserve Bank now doubles down further on QE and loose monetary policy (as they are want to do), some high-cash investors, particularly recent migrants, will still look to deploy some funds into housing.

We need another package to resolve the supply shortfall faster.

 

‘With term deposits offering little, there is nothing left for people to invest in.’

 

I’ve heard this line a couple of times. It is patently untrue.

Some years back, I switched from owning rentals to investing in target companies on global share markets. While the past is no guarantee of the future, so far, this has been a much more rewarding and less stressful experience.

Though you do need a tolerance for risk and volatility. I’ve been both up and down more than 20%. As have most investors over the longer-term.

But the greater trend is markets tend to rise more than they fall. And good quality companies can and do beat the market. Many offering growth with attractive dividend yields.

 

Regards,

Simon Angelo

Editor, Wealth Morning

The information here is general only and should not be construed as a recommendation or an offer to buy or sell any security or the suitability of any investment strategy. We cannot and will not provide any personalised financial advice. For a specific plan or advice to suit your unique situation, please consult an Authorised Financial Adviser.